Will Dollar General's offer spark all-out bidding war?

As financial analysts swooned over Dollar General Corp.'s $9.7 billion cash offer for Family Dollar Stores on Monday, the board of directors of Family Dollar agreed to "carefully review and consider the proposal."

But Family Dollar "remains subject to the merger agreement" it signed with Dollar Tree Inc. on July 28 and its board "has not changed its recommendation in support" of the $8.5 billion cash and stock offer from Dollar Tree, Family Dollar said in a statement Monday afternoon.

Still, Dollar General believes it clearly has the superior offer on the table, said Mary Winn Pilkington, the Goodlettsville-based retailer's vice president of investor and public relations.

"When you think about Dollar General and the journey we've been on since 2008, it's clear that we have the playbook, management team and track record of success," she said.

Whether Chesapeake, Va.-based Dollar Tree would make a counteroffer and spark a bidding war for Family Dollar is "hard to speculate," Pilkington said. "Our No. 1 goal is to get to a point where we can have constructive discussions with Family Dollar and work it out from there.The deal would cement Dollar General's status as America's largest retail presence, giving it 19,584 stores.

"We provided what we view as a superior valuation to Family Dollar shareholders, and it gives them all-cash certainty," she said. "There are clear strategic benefits to Dollar General shareholders as well."

'We are ready to go'

Whether the two suitors would engage in a protracted battle for Charlotte, N.C.-based Family Dollar remains to be seen, but some analysts suggested that might happen.

"I know we are all excited about it (Dollar General's bid) in the financial community," analyst Joe Feldman of the Telsey Advisor Group said during a Dollar General conference call early Monday.

"But how close are you to potentially consummating something like this?" he said. "And presumably, you are willing to fight this out for a little while if Dollar Tree were to come back with an offer."

"We feel that we have an offer that is far superior and we are ready to go," Dollar General Chairman and CEO Rick Dreiling responded. "We want a merger agreement."

After another analyst's question on how far Dollar General might be willing to go in the bidding, Dreiling replied: "I think we have an exceptional offer on the table. Let's let that play out for now."

Retail rivalry

Analysts also questioned Dollar General's timing of the bid and suggested that Wal-Mart's push into smaller retail stores — with its neighborhood markets and its new Wal-Mart Express concept — might be driving the move.

But Dreiling discounted that as a motive for making the bid, suggesting instead that it considered Family Dollar more of a threat than Wal-Mart.

"As we reflect on what Wal-Mart is doing, I think when they talk about small stores, where they are really excited is the neighborhood market," Dreiling said, which is a larger operation than a dollar store.

"I know they are working on an express-type format," he said. "I will tell you they have opened up several of them against us, and honestly, the hit we have taken on those so far has actually been less than what happened when Family Dollar opens up."

Pilkington said Dollar General believes the acquisition of Family Dollar could close in "just under a one-year time frame" after a definitive agreement is reached.

As to how many employees might lose their jobs in the merger, "It's too early to tell," she said. The total number of employees in the combined company would be about 160,000, Dollar General said.

It's also too early to know what effect the merger might have on the store count in the Nashville area, Pilkington said. Dollar General expects to have to close or sell about 700 of the combined company's 20,000 stores to satisfy antitrust concerns. Dollar General alone has 163 stores in the area, spokesman Dan MacDonald said.

As for where the combined company would be headquartered — Nashville or Charlotte, N.C., where Family Dollar is located — "We are very committed to Nashville," Pilkington said. "We are proud to call Nashville our home."

The combined company would have total annual sales of about $28 billion, Dollar General said.

as for the benefits the merger might bring to either Family Dollar or Dollar General's customers, "We do absolutely believe we could learn from each other and take those best practices," Pilkington said. "We both have exceptional corporate cultures that involve taking care of our customers."

Overall, she predicted that the deal would bring "greater value and better selection for Dollar General and Family Dollar customers."

It's also too early to know how much of Family Dollar's management team might stay with the combined company, Pilkington said.

"We certainly think that between the two there would be a lot of talent we would be able to take advantage of," she said.

"It's an exciting time at Dollar General," Pilkington said.

"We're celebrating our 75th anniversary this year. This is just a proposal at this time, and their board has it under advisement. But we've got a great track record with a proven management team."

The combined company, which would operate in 46 states, would be led by Dreiling, who said he would delay his planned retirement at the end of this year until at least May 2016. He said he also would continue as chairman after that if the Dollar General board asked him to.

Merging the two companies would "clearly solidify our position as the leading small-box retailer," Dreiling told analysts in the conference call. "Combined, we would be even stronger. We know this business extremely well."

Dollar General would pay $78.50 per share for Family Dollar's stock, which is 29.4 percent above the $60.66 share price the day before the Dollar Tree bid. That compares with Dollar Tree's $74.50 cash/stock offer.

Dreiling said Dollar General already has financing in place and that its offer does not hinge on obtaining any more financing commitments.

"Goldman Sachs and Citigroup Global Markets Inc. have agreed to provide committed financing" for the transaction, including the $305 million that Family Dollar would have to pay to break off the deal with Dollar Tree, Dreiling said.

Within three years, the combined company would see combined annual savings in its operations of up to $600 million resulting from the merger, he said. That would help generate cash to pay down the debt that would be incurred by the deal.

Cash flow from store operations would be used to pay the debt, he said, rather than to buy back stock, as Dollar General has been doing with its extra cash.

Dollar General would spend up to $400 million on the mechanics of the merger, and an additional $400 million on physical changes that would make the interiors of the Family Dollar stores identical to those of Dollar General, he said.

Dollar General also would introduce its Clover Valley private brand to the Family Dollar stores, Dreiling said.

Todd Vasos, Dollar General's chief operating officer, would oversee the integration of the two companies after the merger.

A look at Dollar General today:

Stores: 11,338

States: 40

Revenue: $17.8 billion

If merger approved:

Stores: 19,584

States: 46

Revenue: $28.2 billion

KEY TAKEAWAYS

Corporate growth: A deal probably would mean continued growth for one of the region's biggest employers and largest corporate citizens. It also probably would mean bad news for Charlotte, N.C., the home of Family Dollar. It probably would lose jobs after a merger of the retail companies.

Competition: The move helps Dollar General in two ways. It defuses the threat from a direct competitor, Family Dollar, and it helps compete against Wal-Mart, which is making a push to open smaller stores that can attract neighborhood-level shoppers.

Time will tell: For a deal to get done, there are still several steps that need to happen. First, Family Dollar would need to reject Dollar Tree and begin negotiations with Dollar General. Then, Dollar General would need to get the merger approved by federal regulators.